Financial reports are crucial in a company. With financial records every month and year, companies can analyze, identify and record all financial history. Therefore, the stages of the accounting cycle are needed.
The accounting cycle aims to provide financial information so that it will be easier for a company to make decisions. Unfortunately, many small companies do not understand how important the accounting cycle is.
These companies generally only record simple financial statements, namely the history of expenses and income. To have good financial management, companies should know about the stages of the accounting cycle.
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What is the Accounting Cycle?
The meaning of the accounting cycle is the process of identifying and analyzing an accounting or financial activity in a company that is carried out repeatedly, within a certain period, namely a period of one month or one year.
You need to know that there are several accounting cycles starting from the bookkeeping opening stage to the journal closing stage which is usually done at the end of the year using the company’s preferred accounting software . Bookkeeping must of course be carried out according to accounting principles.
Types of Accounting Cycle
The accounting cycle itself is divided into 3 types, namely the accounting cycle in services, the accounting cycle in manufacturing and the last, namely the accounting cycle in trade.
There are several different cycle stages that you need to pay attention to, including:
1. Types of Service Company Accounting Cycles
Before learning about the accounting cycle, you must first know about service companies and their characteristics, so that it will make it easier to record transactions . Service companies themselves are companies that offer products that are not concrete or intangible.
Instead, service companies offer sales in an abstract form, namely in the form of services or benefits to consumers or the public. Some examples of service companies are travel companies, courses or tutoring, public transportation services to goods delivery services.
Many people think that these service providers do not need records of the stages of the accounting cycle, of course, that is very wrong. The accounting cycle plays a major role in the smooth running of a company’s finances.
- Creation of evidence and transaction history.
- Making detailed transaction history journals and in accordance with the date of the transaction.
- The process of transferring books from journal entries to the general ledger.
- Making adjusting journal entries.
- Recording of working papers.
- Preparation of financial reports.
- Journal closing.
- Close ledger.
- Preparation of the remaining balance sheet after closing the books.
- Reversing journal entry.
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2. Types of Trading Company Accounting Cycles
If we previously discussed the cycle of service companies, trading companies have slightly different accounting cycles. As the name implies, trading companies offer products that have a concrete or real form to consumers.
Of course, trading companies have more visible records of activities such as purchasing goods, storing and selling merchandise. The stages of the trade accounting cycle include sales prices, main inventory to cost of goods sold, as follows:
- Record transaction history and also proof of transactions. Can record transactions with a bookkeeping application to make it more accurate.
- Keep records of all transactions in a general journal.
- Make records of transaction history into a special journal. The contents of the journal include cash receipts, cash disbursement records, purchases to sales.
- Make records of transaction history in the subsidiary ledger. The contents include accounts payable, accounts receivable and inventories.
- Then, the stage of transferring to the ledger.
- Preparation of residual balances.
- Making adjusting journal entries.
- Recording of working papers.
- Making records of losses and profits.
- Recording of reports on changes in equity.
- Recording of reports on the balance sheet.
- Making closing journal entries.
- General ledger closing.
- Preparation of the remaining balance sheet, after closing the books.
- Reversing journal entry.
3. Types of Manufacturing Company Accounting Cycle
Unlike the previous types of companies, manufacturing companies are companies engaged in the processing of a raw material so that it is formed into a finished product. Of course, the stages of the company’s accounting cycle are also different.
This type of company is actually similar to service and trade companies. What distinguishes it is the service processing process, which starts with raw goods or even raw materials. Then, it is processed into a complete or finished product which is then offered to consumers.
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11 Stages of the Accounting Cycle
There are 11 stages in the accounting cycle that you must know, each stage has a different function and purpose.
In order to obtain valid and reliable financial reports, the following is the order of the stages of the accounting cycle:
1. Identification of Transaction History
This stage is the first stage that must be carried out in making the accounting cycle. With historical records and evidence of each transaction, of course, it will provide information on the direct impact of a company’s financial changes.
It is also required that in every transaction, there is a proof that can facilitate the identification of the transaction. Evidence provided can be in the form of invoices, notes or receipts. This evidence will be recorded and stored by an accountant.
2. Analysis of Transaction History
The next stage in the sequence of stages of the accounting cycle is to analyze each transaction that has been previously recorded. This analysis aims to check the effect of a transaction on the company’s financial condition.
Please note that in accounting records, a double-entry system is usually used. Every transaction made will affect the debit and credit of a company’s finances in the same amount.
Recorded in the following equation formula:
Assets = Liabilities + Equity
The asset itself is a sign of ownership of an asset. Liabilities are purchases of goods and services made through credit. Meanwhile, equity is the property right to the assets of a company that has been reduced by liabilities.
3. Records of Transaction History in the Journal
The third step in the accounting cycle stage is recording transaction history in the journal. The journal itself has a function to record chronologically various transactions carried out within one period of the accounting cycle.
It should also be noted that there are two types of journals in accounting, which are divided into special journals and general journals. A general journal is also known as a journal. The process for recording a journal is to enter a transaction into a credit and debit account.
In contrast to general journals, special journals have a function to increase the efficiency of recording transactions that are carried out repeatedly. Starting from the purchase journal, cash receipts, sales and so on.
4. Transaction Records to the General Ledger
The next stage of the accounting cycle that can be carried out is to record transactions in the general ledger. What is meant by a ledger is a collection of bookkeeping accounts that are used as records of information related to the assets of a company.
In the accounting cycle, each account in the general ledger will be marked with a certain code. This code serves to facilitate the process of identifying transactions in the journal. This code also makes it easier for accountants to double-check transactions that have occurred.
5. Prepare Trial Balance
The fifth stage of the accounting cycle is the trial balance , in accounting terms it means a collection of account balances contained in the general ledger within a certain period of time, one month or one year.
What needs to be done in preparing a trial balance is to transfer and combine the general ledger balances into the trial balance. The balance in both must be ensured the same. If there is a difference in the amount, it means that there is an error because the balance is not balanced.
Usually, if there is a calculation error, an accountant will find out and correct it immediately to get a valid and accurate final result. Any errors made must also be recorded in the adjusting journal.
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6. Record Adjusting Journals
Furthermore, in the stages of the accounting cycle, it is necessary to record such an example of an adjusting journal . This journal itself is a journal consisting of various records related to several accounting transactions that are wrong, have not been recorded, or records that still need to be adjusted.
As explained in the previous point, if there is an error in the trial balance, it must be recorded in an adjusting journal. This journal entry must also be carried out regularly or periodically, generally done when financial reports are to be prepared.
The recording process is also easy and similar to a journal in general. Recorded financial transactions will be recorded and combined in a ledger. If so, the existing balance is ready to be presented in the form of financial statements. All report results are current alias new.
7. Prepare a Trial Balance After Adjusting Entries
At this stage of the accounting cycle, an accountant will prepare a trial balance that has gone through adjusting entries. All you have to do is transfer the balance in the adjusted ledger to the latest trial balance.
All balances in this balance sheet are divided into asset and liability balances, adjusted for their financial transaction status. Then this balance will be arranged so that it has the same amount or nominal. This is the most important thing in preparing a trial balance.
If there is a discrepancy in the amount due to a calculation error, the accountant must find out where the mistake lies. If the accountant cannot fix it, then the financial report cannot be made valid.
8. Performing the Preparation of Financial Statements
The sequence of the stages of the eighth accounting cycle is compiling financial reports. It is necessary to record an adjusted trial balance in accordance with the previous trial balance data, with reference to the adjusting journal. The balance will be divided by liabilities and assets with the same nominal.
Recorded financial reports include profit and loss statements, changes in capital reports, past trial balance reports, cash flow reports, and journal closing reports. Each report has a different function and purpose and it will be easier to make it using a financial reporting application .
The following is a more complete explanation regarding financial statements, including:
- Profit and loss statements aim to describe the performance of a company. This report contains all expenses and income of a company that provides profit and loss results.
- The report on changes in capital aims to change capital that occurs in a company’s financial records so that the impact of each transaction can be seen. There is information regarding the amount of additional paid-in capital and the amount of initial paid-up capital. In addition, the balance of retained earnings and retained earnings for the current period are also recorded in this financial report.
- The statement of cash flows aims to present information related to the amount of cash coming in and out in a period. This report is generally divided into several groups according to cash flows. Starting from investment activities, operating activities to financing activities.
- The balance sheet aims to predict solvency, liquidity and flexibility. This report will show the position of debt, assets to capital.
- Financial Report Notes to view information about detailed additional reports related to a financial account. This report will also present a comprehensive value of the company’s finances.
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9. Prepare Closing Journals
The preparation of closing entries is an important step in the stages of the accounting cycle. An accountant will close the journal by closing the profit and loss account by emptying the value of the account.
It is intended that the accountant can identify where the flow of financial resources and the various activities that are ongoing in one period. Accounts with a nominal value that is completed in carrying out its functions must be closed.
After that, a new accounting cycle can be restarted to measure various transactions and activities that occur.
10. Compile a Trial Balance After Closing the Journal
The next step in the accounting cycle is the preparation of a trial balance after the journal is closed. This trial balance contains a collection of account balances in the general ledger after closing entries are made.
Please note that in this trial balance, only permanent accounts are loaded. The purpose of making this trial balance is to get certainty that the balance is correct and balanced.
Actually, the preparation of the balance sheet after closing this journal is not mandatory and only optional. After this stage, an accountant can proceed to the next step, namely preparing a reversing journal.
11. Prepare Reversing Journal
The last step that needs to be done by an accountant in the order of the stages of the accounting cycle is the preparation of reversing entries. This journal has a function to simplify the recording of various financial activities and transactions that occur periodically in subsequent periods.
The reversing journal itself is the initial opening journal for the next accounting period. An accountant will prepare a reversing journal in accordance with the adjusting journal that has been made.
This means the accountant will restore accounts that were originally debits to credits, whereas credit transactions will be converted to debits. Therefore, this journal is called a reversing journal.
Example of Application of the Accounting Cycle
The stages of the accounting cycle play a large role in the continuity of a company, whether trading, services or manufacturing. With good financial management, all transaction flows and financial activities can run well.
For more details, we will provide examples of cases as below:
- There is a trading company called PT Bunga Indah. This company in every period of one year always closes the financial books. For this reason, accountants from this service company will be assigned to carry out and record various company operations.
- The company can take the steps described above, first by recording transaction history and proof of transactions, then recording all transactions in a general journal.
- After that an accountant can record transaction history into a special journal. The contents of the journal include cash receipts, cash disbursement records, purchases to sales.
- Then, the accountant must record the transaction history in the subsidiary ledger. The contents include accounts payable, accounts receivable and inventories. Then, enter the stage of the accounting cycle of transferring to the general ledger.
- Next, the accountant will make a residual balance and make adjusting journal entries. Then, through the stage of recording working papers and making notes about the profit and loss of a company. After this, a report on changes in equity is recorded.
- Recording reports on balance sheets and making closing journal entries is the next step in the bookkeeping stage of financial statements. Until the final stage, the accountant will close the general ledger and prepare the remaining balance.
- It is necessary to ensure that each type of company has different stages of the company’s accounting cycle, so you need to pay attention in advance what type of company you are developing.
You only need to follow each step and sequence of stages of the company cycle properly and thoroughly. This accounting cycle is very important for the company’s financial operations.